How the Robin Hood Tax Would Take Money From the Rich for the Poor

How the Robin Hood Tax Would Take Money From the Rich for the Poor

The 99% just may hit a target—with the help of a bow and arrow.

A new proposal for a levy on trades in the financial markets, dubbed the Robin Hood tax, would take money from banks and give it to the poor (as well as raise funds for governments around the world). The idea, which has been around for more than a century, has recently gained momentum with the Occupy Wall Street movement.

Though each country has its own proposal, the general idea has support from several world leaders such as the presidents of France, Germany and Italy, billionaires such as Bill Gates and George Soros, and Al Gore, Ralph Nader and the Pope (plus promotional videos starring British actor Bill Nighy and Sir Ben Kingsley).

At last month's Group of 20 meetings for leaders of 20 wealthy and key emerging countries, the proposed tax inspired thousands of protesters—hundreds of whom were dressed in green Robin Hood outfits and armed with bows and arrows—to urge the convening countries to do more to help the poor.

“We all agree that a financial transaction tax would be the right signal to show that we have understood that financial markets have to contribute their share to the recovery of economies,” Germany's chancellor, Angela Merkel, said recently.

While leaders in both Britain and the United States are hesitant, legislation proposing such a tax is already on the table in a few countries, including the U.S.

But just how would such a tax work, and considering the opposition—who decry it as yet another drag on free markets—how would it ever pass?

Robin Hood 2.0

The general idea for the Robin Hood tax is that it would levy a small fee on trades of stocks, bonds and other financial instruments, though the amounts proposed so far vary from country to country and proposal to proposal. But the general gist is that if such a tax is in place, then every time a brokerage company places an order for a stock or mutual fund, it would have to pay the transactions tax.

The Robin Hood tax bill currently in Congress would levy a $3 tax for every $10,000 of transactions and could raise $350 billion over 10 years. Other proposals in the U.S. include one by the nurses' union, which has suggested a tax of $50 per $10,000 in trades, the current tax rate on stock trades in Britain. (The current proposal in Britain, which prime minister Cameron opposes, would expand the country's fee to more than just stock transactions.) Meanwhile, Hong Kong and Singapore charge $10 or $20 for every $10,000 in trades for certain transactions.

The European Commission in Brussels has endorsed a tax to commence in 2014 for all countries in the European Union that would raise an estimated $77 billion. On Sunday, Italian prime minister Mario Monti announced plans for a limited version of such a tax in Italy and publicly advocated for a financial transactions tax across Europe. And last month, when Bill Gates met the Group of 20 leaders, he proposed a financial transactions tax in the G-20 countries that could raise $48 billion or more annually.

As for the current proposals, not only do countries need to settle on the amounts they'll levy, but they also have to determine how to allocate the money.

While Gates and French President Nicolas Sarkozy would like the money raised to support development in the world's poorest countries, Merkel and U.S. lawmakers see it as a tool to fight government deficit. Meanwhile, U.S. labor groups such as the nurses' union and the A.F.L.-C.I.O say it could help fight unemployment and fund job creation programs.

Fears of Consequences

The Obama Administration has reservations about the tax, believing it would hurt pension funds, individual investors and banks. Indeed, critics say that such a tax could hurt retirees if the costs of the tax are passed along in 401(k) fees and other charges.

Administration officials instead support a tax on the assets of the largest banks that they believe would deter risky behavior. “The president is sympathetic to the goals that a financial transactions tax is trying to achieve and he is pushing for a financial crisis responsibility fee and closing other Wall Street loopholes as the best and most feasible way to achieve those goals,” an administration official said to the New York Times.

Britain's prime minister Cameron fears that such a tax, if not implemented globally, would cause investors to flee to countries without such a tax.

Detractors also say that a financial transactions tax would add too much to the cost of trading—more than what investors pay in commissions. “At a time when we face a slow economic recovery, such a tax will impede the efficiency of markets and impair depth and liquidity as well as raise costs to the issuers, pensions and investors who help drive economic growth,” said Kenneth E. Bentsen Jr., executive vice president for public policy at the Securities Industry and Financial Markets Association.

Advocates' Rebuttal

Supporters have ready answers for the criticisms. First, they say the small amount retirees pay in fees would be offset by the greater benefit of a more stable stock market, because the tax will discourage the kind of high-frequency trading that causes volatility in the market.

Second, they point to the fact that Britain has already imposed a financial transactions tax on stocks and has not suffered from investors leaving its markets.

Will It Hit Its Mark?

In the U.S., the legislation faces an uphill battle due to resistance from Republicans, who control the House, as well as conservative Democrats, who can filibuster legislation. However, the idea is more popular in other countries, especially Europe. Unfortunately, that won't help the cause in the U.S., because Republicans, the main obstacle, are especially unswayed by European trends.

But once European leaders agree on a plan to save the euro zone, they could then turn their attention to instituting such a tax.

If it comes to pass, the hero of Sherwood forest would be proud.

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